The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively the “agencies”) issued the attached supervisory guidance on allowance for loan and lease losses (ALLL) estimation practices associated with loans and lines of credit secured by junior liens on one- to four-family residential properties. The agencies issued the guidance to reiterate policy and to remind regulated financial institutions to monitor all credit quality indicators relevant to credit portfolios, including junior liens. Examples of junior liens include second mortgages and home equity lines of credit taken out by mortgage borrowers. The supervisory guidance reiterates key concepts included in generally accepted accounting principles and existing ALLL supervisory guidance related to the ALLL and loss estimation practices and reminds institutions to follow appropriate risk-management principles in managing junior lien loans and lines of credit. If you are a regulated financial institution under the supervision of one of the above agencies with a loan portfolio containing junior liens, this supervisory guidance pertains to you. Otherwise, you may disregard this memorandum.